Post Budget Sector Analysis

Budget Proposal

• Allocation towards Bharat Nirman increased by 32% to Rs 246 bn - Yes
• Increase in provision for National Highway Development Programme (NHDP) by 7.2% to Rs 107 bn - Yes
• Enhanced allocation for Jawaharlal Nehru National Urban Renewal Mission (JNNURM) to Rs 499 bn, an increase of 9% - Yes
• Corpus of Rural Infrastructure Development Fund–XIII (RIDF) for FY08 raised to Rs 120 bn - Yes
• Separate window for rural roads under RIDF-XIII to be continued in FY08 with a corpus of Rs 40 bn - Yes
• Utilisation of foreign reserves towards infrastructure development - Yes
• Tax on dividend distributed by companies to be hiked from 12.5% to 15% - No
• Additional education cess of 1% to fund secondary and higher education - No

Sector Impact

• Since government spending on infrastructure is the most important growth driver for construction companies, the proposed increase in allocation will translate into awarding of more projects
• Leveraging of foreign exchange reserves for infrastructure development to result in increased availability of funds with the government and thereby result in faster infrastructure growth for the country
• Higher education cess and dividend distribution tax to impact net profits and retained earnings respectively

Company Impact

• Positive for construction companies like IVRCL, HCC and Gammon who are engaged in the development of roads, irrigation and water supply projects
• Higher allocation to sanitation schemes likely to benefit companies like Hindustan Sanitaryware, Parryware and Kajaria Ceramics

Sector Outlook

Since government spending on infrastructure is the most important growth driver for construction companies, the proposed increase in allocation will translate into awarding of more projects. Further, leveraging of foreign exchange reserves for infrastructure development will result in increased availability of funds with the government and thereby result in faster infrastructure growth for the country. Despite huge order backlogs, timely execution of orders by construction companies remains our major concern. Rising raw material prices are also likely to be a tough nut to crack for these companies.